----

----

**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-QSB**

|   |   |                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|
| þ |   | **QUARTERLY                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                1934** |

**For      the quarterly period ended September 30, 2007**

|   |   |                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------|
| o      |   | **TRANSITION                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE                ACT** |

**For      the Transition Period from **
**_______________________**
**      to **
**_______________________**

**Commission      file number 000-32925**

**AVATAR      SYSTEMS, INC.**

|                                                                                             |   |                                                                        |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|
| Texas(State                or other jurisdiction ofincorporation                or organization) |   | 75-2796037(I.R.S.                EmployerIdentification                No.) |

----

----

----

| **PART                    I. FINANCIAL INFORMATION**                                                          | **1**  |
|---------------------------------------------------------------------------------------------------------------|--------|
| Item                    1. Financial Statements                                                               | 1      |
| Item                    2. Management’s Discussion and Analysis or Plan of                    Operation | 8      |
| Item                    3. Controls and Procedures                                                            | 18     |
| **PART                    II. OTHER INFORMATION**                                                             | **18** |
| Item                    1. Legal Proceedings                                                                  | 18     |
| Item                    2. Unregistered Sales of Equity Securities and Use of                    Proceeds     | 18     |
| Item                    3. Defaults Upon Senior Securities                                                    | 18     |
| Item                    4. Submission of Matters to a Vote of Security Holders                                | 18     |
| Item                    5. Other Information                                                                  | 18     |
| Item                    6. Exhibits                                                                           | 18     |
| Signatures                                                                                                    | 19     |

----

**PART      I. FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**BALANCE        SHEETS**

|                                                                                          |   | September                30, |      | December                31, |   |
|-----------------------------------------------------------------------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
|                                                                                          |   | 2007                         |      | 2006                        |   |
|                                                                                          |   | (unaudited)                  |      | (audited)                   |   |
| **ASSETS**                                                                                    |   |                         |      |                        |   |
| **CURRENT                ASSETS**                                                             |   |                         |      |                        |   |
| Cash                and cash equivalents                                                      |   | $                            | 217,662   |                        | $      | 322,047 |   |
| Marketable                securities                                                          |   |                         | 378,272   |                        |   | 395,115 |   |
| Accounts                receivable                                                            |   |                         | 231,566   |                        |   | 351,570 |   |
| Prepaid                expenses and other current assets                                      |   |                         | 44,361    |                        |   | 31,499 |   |
| Deferred                income taxes                                                          |   |                         | 21,614    |                        |   | 16,853 |   |
| **Total                current assets**                                                       |   |                         | 893,475   |                        |   | 1,117,084 |   |
|                                                                                          |   |                         |      |                        |   |   |   |
| **PROPERTY                AND EQUIPMENT**,                net of accumulated depreciation     |   |                         |      |                        |   |   |   |
| of                $644,061 and $489,004, respectively                                         |   |                         | 367,090   |                        |   | 456,514 |   |
| **PURCHASED                SOFTWARE,**net                of accumulated amortization          |   |                         |      |                        |   |   |   |
| of                $1,218,546 and $989,144, respectively                                       |   |                         | 1,784,817 |                        |   | 2,014,219 |   |
| **SOFTWARE                DEVELOPMENT COSTS,**                net of accumulated amortization |   |                         |      |                        |   |   |   |
| of                $2,118,962 and $1,779,122, respectively                                     |   |                         | 3,126,783 |                        |   | 2,752,417 |   |
|                                                                                          |   |                         |      |                        |   |   |   |
| **OTHER                ASSETS, net**                                                          |   |                         | 129,759   |                        |   | 173,876 |   |
| **Total                assets**                                                               |   | $                            | 6,301,924 |                        | $      | 6,514,110 |   |

|                                                                                                        |   |
|-------------------------------------------------------------------------------------------------------------|--------|
| **LIABILITIES,                    TEMPORARY EQUITY AND****PERMANENT                  STOCKHOLDERS' EQUITY** |   |

|                                                                                                           |   |   |      |   |   |      |   |
|----------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|-----------|--------|
| **CURRENT                  LIABILITIES**                                                                       |   |   |      |   |   |      |   |
| Accounts                  payable                                                                              |   | $      | 251,944   |   | $      | 273,504   |   |
| Accrued                  expenses                                                                              |   |   | 138,217   |   |   | 161,678   |   |
| Line-of-credit                                                                                                 |   |   | 145,067   |   |   | 145,067   |   |
| Federal                  income taxes payable                                                                  |   |   | 19,419    |   |   | -         |   |
| Current                  maturities of capital lease obligations                                               |   |   | 22,109    |   |   | 32,335    |   |
| Current                  maturities of long-term debt                                                          |   |   | 95,300    |   |   | 88,165    |   |
| Current                  maturities of notes payable-stockholders                                              |   |   | 109,620   |   |   | 71,608    |   |
| Deferred                  revenue                                                                              |   |   | 356,742   |   |   | 361,604   |   |
| **Total                  current liabilities**                                                                 |   |   | 1,138,418 |   |   | 1,133,961 |   |
|                                                                                                           |   |   |      |   |   |      |   |
| **DEFERRED                  INCOME TAXES**                                                                     |   |   | 572,153   |   |   | 587,684   |   |
|                                                                                                           |   |   |      |   |   |      |   |
| **OTHER                  LONG-TERM LIABILITIES**                                                               |   |   | 85,434    |   |   | 93,361    |   |
|                                                                                                           |   |   |      |   |   |      |   |
| **LONG-TERM                  DEBT**                                                                            |   |   |      |   |   |      |   |
| Long-term                  capital lease obligations                                                           |   |   | 28,255    |   |   | 34,549    |   |
| Long-term                  debt                                                                                |   |   | 317,667   |   |   | 412,244   |   |
| Note                  payable-stockholders                                                                     |   |   | 470,130   |   |   | 567,403   |   |
| Convertible                  notes payable-stockholders                                                        |   |   | 280,000   |   |   | 280,000   |   |
| **Total                  long-term debt**                                                                      |   |   | 1,096,052 |   |   | 1,294,196 |   |
| **Total                  liabilities**                                                                         |   |   | 2,892,057 |   |   | 3,109,202 |   |
|                                                                                                           |   |   |      |   |   |      |   |
| **COMMITMENTS                  AND CONTINGENCIES**                                                             |   |   | -         |   |   | -         |   |
|                                                                                                           |   |   |      |   |   |      |   |
| **TEMPORARY                  EQUITY**                                                                          |   |   |      |   |   |      |   |
| Common                  stock, subject to put rights, 200,000 shares issued and                  outstanding   |   |   | 101,000   |   |   | 101,000   |   |
|                                                                                                           |   |   |      |   |   |      |   |
| **PERMANENT                  STOCKHOLDERS' EQUITY**                                                            |   |   |      |   |   |      |   |
| Preferred                  stock, $0.001 par value, 10,000,000 shares authorized; none                  issued |   |   | -         |   |   | -         |   |
| Common                  stock, $0.001 par value; 30,000,000 shares authorized;                                 |   |   |           |   |   |           |   |
| 8,838,152                  shares issued and outstanding                                                       |   |   | 8,838     |   |   | 8,838     |   |
| Paid-in                  capital                                                                               |   |   | 2,166,034 |   |   | 2,154,741 |   |
| Retained                  earnings                                                                             |   |   | 1,120,798 |   |   | 1,130,006 |   |
| Accumulated                  other comprehensive income                                                        |   |   | 13,197    |   |   | 10,323    |   |
| **Total                  stockholders' equity**                                                                |   |   | 3,308,867 |   |   | 3,303,908 |   |
| **Total                  liabilities, temporary equity and permanent stockholders'                  equity**   |   | $      | 6,301,924 |   | $      | 6,514,110 |   |
|                                                                                                           |   |   |      |   |   |      |   |
| See                  accompanying notes to financial statements.                                               |   |   |      |   |   |      |   |

----

| Avatar                  Systems, Inc.         |   |
|-----------------------------------------------|--------|
| **STATEMENTS                  OF OPERATIONS** |   |
| (unaudited)                                   |   |

|                                                               |   | Three                  months ended |      | Nine                  months ended |   |
|--------------------------------------------------------------------|--------|-------------------------------------|-----------|------------------------------------|--------|
|                                                               |   | September                  30,      |      | September                  30,     |
|                                                               |   | 2007                                |      | 2006                               |   | 2007 |   | 2006 |   |
| **Revenue:**                                                       |   |                                |      |                               |   |   |   |   |   |
| Software                                                           |   | $                                   | 116,907   |                               | $      | 266,051 |   | $ | 431,582 |   | $ | 649,519 |   |
| Maintenance                                                        |   |                                | 656,043   |                               |   | 478,439 |   |   | 1,933,436 |   |   | 1,186,512 |   |
| Professional                  services                             |   |                                | 136,716   |                               |   | 196,621 |   |   | 462,359 |   |   | 412,481 |   |
| Hardware                                                           |   |                                | 99,353    |                               |   | 78,442 |   |   | 121,314 |   |   | 192,919 |   |
| **Total                  revenue**                                 |   |                                | 1,009,019 |                               |   | 1,019,553 |   |   | 2,948,691 |   |   | 2,441,431 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Cost                  of revenue:**                              |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| Software                                                           |   |                                | 34,606    |                               |   | 100,026 |   |   | 136,858 |   |   | 274,603 |   |
| Maintenance                                                        |   |                                | 156,561   |                               |   | 108,833 |   |   | 386,069 |   |   | 226,274 |   |
| Professional                  services                             |   |                                | 53,967    |                               |   | 56,160 |   |   | 163,760 |   |   | 103,013 |   |
| Hardware                                                           |   |                                | 94,367    |                               |   | 66,951 |   |   | 113,285 |   |   | 158,578 |   |
| **Total                  cost of revenue**                         |   |                                | 339,501   |                               |   | 331,970 |   |   | 799,972 |   |   | 762,468 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Gross                  profit**                                  |   |                                | 669,518   |                               |   | 687,583 |   |   | 2,148,719 |   |   | 1,678,963 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Operating                  expenses:**                           |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| Sales                  and marketing                               |   |                                | 86,325    |                               |   | 132,124 |   |   | 312,583 |   |   | 271,161 |   |
| General                  and administrative                        |   |                                | 307,440   |                               |   | 254,650 |   |   | 931,693 |   |   | 555,459 |   |
| Amortization                                                       |   |                                | 189,747   |                               |   | 148,144 |   |   | 569,242 |   |   | 344,467 |   |
| Depreciation                                                       |   |                                | 52,843    |                               |   | 57,062 |   |   | 155,057 |   |   | 159,499 |   |
| **Total                  operating expenses**                      |   |                                | 636,355   |                               |   | 591,980 |   |   | 1,968,575 |   |   | 1,330,586 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Operating                  income**                              |   |                                | 33,163    |                               |   | 95,603 |   |   | 180,144 |   |   | 348,377 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Other                  income (expense):**                       |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| Investment                  income                                 |   |                                | 4,483     |                               |   | 6,465 |   |   | 12,945 |   |   | 18,770 |   |
| Gain                  (loss) on sales of marketable securities     |   |                                | (516      | )                                  |   | 18,280 |   |   | (531 | ) |   | 18,022 |   |
| Interest                  expense                                  |   |                                | (65,563   | )                                  |   | (33,522 | ) |   | (206,509 | ) |   | (39,212 | ) |
| **Total                  other expense**                           |   |                                | (61,596   | )                                  |   | (8,777 | ) |   | (194,095 | ) |   | (2,420 | ) |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Income                  (loss) before income taxes**             |   |                                | (28,433   | )                                  |   | 86,826 |   |   | (13,951 | ) |   | 345,957 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| Deferred                  income tax expense (benefit)             |   |                                | (9,667    | )                                  |   | 29,521 |   |   | (4,743 | ) |   | 117,625 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **NET                  INCOME (LOSS)**                             |   | $                                   | (18,766   | )                                  | $      | 57,305 |   | $ | (9,208 | ) | $ | 228,332 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Other                  comprehensive income (loss), net of tax** |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| Unrealized                  gain (loss) on marketable securities   |   |                                | (166      | )                                  |   | (2,920 | ) |   | 4,355 |   |   | 6,722 |   |
| Deferred                  income tax expense (benefit)             |   |                                | (56       | )                                  |   | (993 | ) |   | 1,481 |   |   | 2,285 |   |
| **Other                  comprehensive income (loss)**             |   |                                | (110      | )                                  |   | (1,927 | ) |   | 2,874 |   |   | 4,437 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Total                  comprehensive income (loss)**             |   | $                                   | (18,876   | )                                  | $      | 55,378 |   | $ | (6,334 | ) | $ | 232,769 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Net                  income (loss) per share:**                  |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Basic                  and diluted**                             |   | $                                   | (0.00     | )                                  | $      | 0.01 |   | $ | (0.00 | ) | $ | 0.03 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Weighted                  average common shares outstanding:**   |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| **Basic**                                                          |   |                                | 9,038,152 |                               |   | 8,933,804 |   |   | 9,038,152 |   |   | 8,870,386 |   |
| **Diluted**                                                        |   |                                | 9,038,152 |                               |   | 9,297,546 |   |   | 9,038,152 |   |   | 9,017,950 |   |
|                                                               |   |                                |      |                               |   |   |   |   |   |   |   |   |   |
| See                  accompanying notes to financial statements.   |   |                                |      |                               |   |   |   |   |   |   |   |   |   |

----

| Avatar                  Systems, Inc.         |   |
|-----------------------------------------------|--------|
| **STATEMENTS                  OF CASH FLOWS** |   |
| (unaudited)                                   |   |

|                                                                                    |   | Nine                  months ended |     |
|-----------------------------------------------------------------------------------------|--------|------------------------------------|----------|
|                                                                                    |   | September                  30,     |     |
|                                                                                    |   | 2007                               |     | 2006 |   |
| **Cash                  flows from operating activities**                               |   |                               |     |   |   |
| Net                  income (loss)                                                      |   | $                                  | (9,208   | ) | $ | 228,332 |   |
| Adjustments                  to reconcile net income to net cash                        |   |                               |     |   |   |   |   |
| provided                  by operating activities:                                      |   |                               |     |   |   |   |   |
| Amortization                  of software costs                                         |   |                               | 569,242  |   |   | 344,467 |   |
| Non-cash                  interest expense                                              |   |                               | 94,656   |   |   | 11,077 |   |
| Depreciation                                                                            |   |                               | 155,057  |   |   | 159,499 |   |
| (Gain)                  loss on sale of marketable securities                           |   |                               | 531      |   |   | (18,022 | ) |
| Stock                  compensation expense                                             |   |                               | 11,293   |   |   | 3,577 |   |
| Deferred                  income tax expense (benefit)                                  |   |                               | (21,773  | ) |   | 117,625 |   |
| Changes                  in operating assets and liabilities:                           |   |                               |     |   |   |   |   |
| Accounts                  receivable                                                    |   |                               | 120,004  |   |   | (148,390 | ) |
| Prepaid                  expenses and other current assets                              |   |                               | (12,862  | ) |   | 2,231 |   |
| Other                  assets                                                           |   |                               | -        |   |   | (12,906 | ) |
| Accounts                  payable                                                       |   |                               | (21,560  | ) |   | 132,885 |   |
| Accrued                  expenses                                                       |   |                               | (23,461  | ) |   | 30,710 |   |
| Federal                  income taxes payable                                           |   |                               | 19,419   |   |   | - |   |
| Deferred                  revenue                                                       |   |                               | (4,862   | ) |   | 85,351 |   |
| Other                  long-term liabilities                                            |   |                               | (7,927   | ) |   | 76,626 |   |
| Net                  cash provided by operating activities                              |   |                               | 868,549  |   |   | 1,013,062 |   |
|                                                                                    |   |                               |     |   |   |   |   |
| **Cash                  flows from investing activities**                               |   |                               |     |   |   |   |   |
| Software                  development costs capitalized                                 |   |                               | (714,206 | ) |   | (499,143 | ) |
| Purchases                  of property and equipment                                    |   |                               | (55,133  | ) |   | (141,631 | ) |
| Acquisition                  of Questa Software Systems, Inc., net of cash acquired     |   |                               | -        |   |   | (1,776,095 | ) |
| Purchases                  of marketable securities                                     |   |                               | (554,118 | ) |   | (757,220 | ) |
| Proceeds                  from sale of marketable securities                            |   |                               | 574,785  |   |   | 824,490 |   |
| Net                  cash used in investing activities                                  |   |                               | (748,672 | ) |   | (2,349,599 | ) |
|                                                                                    |   |                               |     |   |   |   |   |
| **Cash                  flows from financing activities**                               |   |                               |     |   |   |   |   |
| Principal                  payments on capital lease obligations                        |   |                               | (27,020  | ) |   | (27,298 | ) |
| Principal                  payments on long-term debt                                   |   |                               | (87,442  | ) |   | (13,262 | ) |
| Principal                  payments on long-term debt-stockholders                      |   |                               | (109,800 | ) |   | - |   |
| Proceeds                  from line-of-credit                                           |   |                               | -        |   |   | 145,067 |   |
| Proceeds                  from long-term debt                                           |   |                               | -        |   |   | 476,500 |   |
| Proceeds                  from notes payable-stockholders                               |   |                               | -        |   |   | 823,500 |   |
| Net                  cash provided by (used in) financing activities                    |   |                               | (224,262 | ) |   | 1,404,507 |   |
|                                                                                    |   |                               |     |   |   |   |   |
| Net                  increase (decrease) in cash and cash equivalents                   |   |                               | (104,385 | ) |   | 67,970 |   |
|                                                                                    |   |                               |     |   |   |   |   |
| Cash                  and equivalents at beginning of period                            |   |                               | 322,047  |   |   | 257,056 |   |
|                                                                                    |   |                               |     |   |   |   |   |
| Cash                  and cash equivalents at end of period                             |   | $                                  | 217,662  |   | $ | 325,026 |   |
|                                                                                    |   |                               |     |   |   |   |   |
| Supplemental                  disclosure of cash paid for:                              |   |                               |     |   |   |   |   |
| Interest                                                                                |   | $                                  | 111,853  |   | $ | 28,135 |   |
|                                                                                    |   |                               |     |   |   |   |   |
| Supplemental                  disclosure of noncash investing and financing activities: |   |                               |     |   |   |   |   |
| Change                  in unrealized gain on marketable securities, net of tax         |   | $                                  | 2,874    |   | $ | 4,436 |   |
| Purchase                  of equipment under capital lease obligation                   |   | $                                  | 10,500   |   | $ | 29,800 |   |
| Debt                  for additional consideration related to acquisition               |   | $                                  | -        |   | $ | 75,000 |   |
| Stock                  issued in connection with acquisition                            |   | $                                  | -        |   | $ | 101,000 |   |
| Debt                  issued in connnection with acquisition                            |   | $                                  | -        |   | $ | 280,000 |   |
| Stock                  options issued related to debt                                   |   | $                                  | -        |   | $ | 379,197 |   |
|                                                                                    |   |                               |     |   |   |   |   |
| See                  accompanying notes to financial statements.                        |   |                               |     |   |   |   |   |

----

**1.      Basis of Presentation**

**2.      Recent Accounting Standards and Pronouncements**

*Accounting      for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109      Accounting for Income Taxes*

**3.      Acquisition**

----

| Current                  assets         |   | $      | 138,116   |   |
|-----------------------------------------|--------|--------|-----------|--------|
| Computers                  and software |   |   | 27,370    |   |
| Furniture                  and fixtures |   |   | 14,379    |   |
| Purchased                  software     |   |   | 2,141,702 |   |
| Current                  liabilities    |   |   | (82,144   | )      |
|                                    |   | $      | 2,239,423 |   |

|                                                           |   | Three                           |      |                            |   |
|----------------------------------------------------------------|--------|---------------------------------|-----------|---------------------------------|--------|
|                                                           |   | months                          |      | Nine                    months  |   |
|                                                           |   | ended                           |      | ended                           |   |
|                                                           |   | September                    30 |      | September                    30 |   |
|                                                           |   | 2006                            |      | 2006                            |   |
|                                                           |   | (unaudited)                     |      | (unaudited)                     |   |
| Total                    revenue                               |   | $                               | 1,147,155 |                            | $      | 3,507,763 |   |
| Net                    income                                  |   | $                               | 75,030    |                            | $      | 387,991 |   |
| Net                    income per share:                       |   |                            |      |                            |   |   |   |
| Basic                    and diluted                           |   | $                               | 0.01      |                            | $      | 0.04 |   |
| Weighted                    average common shares outstanding: |   |                            |      |                            |   |   |   |
| Basic                                                          |   |                            | 9,038,152 |                            |   | 9,038,152 |   |
| Diluted                                                        |   |                            | 9,481,894 |                            |   | 9,052,733 |   |

**4.      Long-term Debt**

**Long-term      Debt to Financial Institution**

----

**Note      Payable-Stockholders**

----

**Convertible      Notes Payable-Stockholders**

**5.      Temporary Equity**

*Classification      and Measurement of Redeemable Securities.*

**6.      Stock Option Plans**

|                                                                   |   | Three                  months ended |    | Nine                  months ended |   |
|------------------------------------------------------------------------|--------|-------------------------------------|---------|------------------------------------|--------|
|                                                                   |   | September                  30,      |    | September                  30,     |   |
|                                                                   |   | 2007                                |    | 2006                               |   | 2007 |   | 2006 |   |
| Operating                  expenses:                                   |   |                                |    |                               |   |   |   |   |   |
| General                  and administrative (employee related options) |   | $                                   | 3,765   |                               | $      | 3,577 |   | $ | 11,293 |   | $ | 3,577 |   |
| Other                  income (expense):                               |   |                                |    |                               |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                      |   |                                | 29,127  |                               |   | 10,788 |   |   | 92,057 |   |   | 10,788 |   |
| Share-based                  expense before taxes                      |   |                                | 32,892  |                               |   | 14,365 |   |   | 103,350 |   |   | 14,365 |   |
| Related                  income tax benefits                           |   |                                | (11,183 | )                                  |   | (4,884 | ) |   | (35,139 | ) |   | (4,884 | ) |
| Share-based                  expense, net of taxes                     |   | $                                   | 21,709  |                               | $      | 9,481 |   | $ | 68,211 |   | $ | 9,481 |   |

----

**Stock      Option Activity **

|                                                       |   | Options |      | Weighted                  Average Exercise Price |   | Weighted                  Average Remaining Contractual Term (years) |   | Aggregate                  Intrinsic Value |   |
|------------------------------------------------------------|--------|---------|-----------|--------------------------------------------------|--------|----------------------------------------------------------------------|--------|--------------------------------------------|--------|
| Options                  outstanding at December 31, 2006  |   |    | 1,276,477 |                                             | $      | 0.528                                                                |   |                                       |   |   |   |   |   |
| Options                  granted                           |   |    | -         |                                             |   | -                                                                    |   |                                       |   |   |   |   |   |
| Options                  exercised                         |   |    | -         |                                             |   | -                                                                    |   |                                       |   |   |   |   |   |
| Options                  forfeited                         |   |    | (13,000   | )                                                | $      | 0.505                                                                |   |                                       |   |   |   |   |   |
| Options                  outstanding at September 30, 2007 |   |    | 1,263,477 |                                             | $      | 0.528                                                                |   |                                       | 6.33   |   | $ | 361,080 |   |
| Options                  exercisable at September 30, 2007 |   |    | 1,188,810 |                                             | $      | 0.466                                                                |   |                                       | 6.17   |   | $ | 339,053 |   |

**Item      2. Management’s Discussion and Analysis or Plan of      Operation**

**SPECIAL      NOTE REGARDING FORWARD-LOOKING STATEMENTS**

----

**Three      Months Ended September 30, 2007 Compared to Three Months Ended September 30,      2006**

*Revenue:*

|                                   |   | Three                  months ended September                  30, |      | Change |   |
|----------------------------------------|--------|--------------------------------------------------------------------|-----------|--------|--------|
|                                   |   | 2007                                                               |      | 2006   |   | Amount |   | % |   |
| Software                               |   | $                                                                  | 116,907   |   | $      | 266,051 |   | $ | (149,144 | ) |   | (56.1 | ) |
| Maintenance                            |   |                                                               | 656,043   |   |   | 478,439 |   |   | 177,604 |   |   | 37.1 |   |
| Professional                  services |   |                                                               | 136,716   |   |   | 196,621 |   |   | (59,905 | ) |   | (30.5 | ) |
| Hardware                               |   |                                                               | 99,353    |   |   | 78,442 |   |   | 20,911 |   |   | 26.7 |   |
| Total                  revenue         |   | $                                                                  | 1,009,019 |   | $      | 1,019,553 |   | $ | (10,534 | ) |   | (1.0 | ) |

*Software:*

|   | · | Revenue                from software sales for the quarter ended September 30, 2007 was                $116,907                compared with $266,051 from the quarter ended September 30,                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Questa products were $42,605 for the quarter ended September                30,                2007. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Avatar products for the quarter decreased 38.3% to $74,302                compared with $120,493 for the quarter ended September 30,                2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales were unusually strong for the quarter ended September 30, 2006                while                2007 sales for the same period in 2007 have been                disappointing. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Maintenance                revenue for the quarter ended September 30, 2007 increased 37.1%                to                $656,043 compared with $478,439 in                2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Maintenance                revenue related to the Questa acquisition was $235,006 for the quarter                ended September 30, 2007. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Maintenance                revenue for existing products increased 25.3% to $421,037 compared                with                $335,947 in 2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The                increase in maintenance revenue was primarily related to the strength                of                ASP sales in 2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Maintenance                revenue for the fourth quarter of 2007 will be impacted by an increase                in                maintenance prices provided for in our maintenance contracts effective                September 1, 2007. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Maintenance                revenue will also increase during the fourth quarter of 2007 due                to the                projected increase in software                sales. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

|   | · | Professional                service revenue for the quarter ended September 30, 2007 decreased                30.5%                to $136,716 compared with $196,621 for the quarter ended September                30,                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services revenue related to the Questa acquisition for the quarter                ended                September 30, 2007 was $51,644. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services related to existing products decreased 29.8% to $85,072                for the                quarter ended September 30, 2007 compared with $121,168 in                2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services for the quarter ended September 30, 2007 decreased in relation                to                weaker software sales. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Professional                services for the fourth quarter of 2007 are expected to be significantly                higher in relation to the projected increase in software sales and                demand                for custom programming services. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

|   | · | Hardware                sales for the quarter ended September 30, 2007 increased to $99,353                compared with $78,442 in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Questa                was not a reseller of hardware products. We expect hardware sales                to                increase in the future because of the acquisition, anticipated technology                changes and relationships that we have with hardware                vendors. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Cost      of Revenue:*

|                                   |   | Three                  months ended September                  30, |    | Change |   |
|----------------------------------------|--------|--------------------------------------------------------------------|---------|--------|--------|
|                                   |   | 2007                                                               |    | 2006   |   | Amount |   | % |   |
| Software                               |   | $                                                                  | 34,606  |   | $      | 100,026 |   | $ | (65,420 | ) |   | (65.4 | ) |
| Maintenance                            |   |                                                               | 156,561 |   |   | 108,833 |   |   | 47,728 |   |   | 43.9 |   |
| Professional                  services |   |                                                               | 53,967  |   |   | 56,160 |   |   | (2,193 | ) |   | (3.9 | ) |
| Hardware                               |   |                                                               | 94,367  |   |   | 66,951 |   |   | 27,416 |   |   | 40.9 |   |
| Total                  cost of revenue |   | $                                                                  | 339,501 |   | $      | 331,970 |   | $ | 7,531 |   |   | 2.3 |   |
|                                   |   |                                                               |    |   |   |   |   |   |   |   |   |   |   |

*Software:*

|   | · | Cost                of software sales for the quarter ended September 30, 2007 decreased                65.4%                to $34,606 compared with $100,026 for the quarter ended September                30,                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales for existing products decreased 57.6% to $29,566                from                $69,777 in 2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software as a percentage of the related revenue decreased to 29.6%                for                the quarter ended September 30, 2007 from 37.6% in                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Lower                cost of software sales and the decrease in the percentage of cost                of                software was related to lower commission costs on lower software                sales                volume. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Our                primary supplier of database components has changed their pricing                structure so that the database is now available for distribution                to us at                no cost. We had expected an increase cost of software sales in the                future                because the supplier had previously increased the price of the database                component. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Cost                of maintenance revenue for the quarter ended September 30, 2007 increased                43.9% to $156,561 compared with $108,833 in                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance revenue related to the Questa acquisition was $22,223                for                the quarter ended September 30,                2007. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance revenue for existing products increased 112.0% to                $134,338                compared with $63,354 in 2006. The increase in cost of maintenance                revenue                was related to the increase in maintenance revenue from strong ASP                sales                completed during 2007 and 2006 and the increase in database components                that was mentioned previously. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance as a percentage of the related revenue increased to                23.9%                for the quarter ended September 30, 2007 compared with 22.7% in 2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Professional      services:*

|   | · | Cost                of professional services for the quarter ended September 30, 2007                decreased 3.9% to $53,967 compared with $56,160 in                2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services related to the Questa acquisition was $24,132                for                the quarter ended September 30,                2007. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services for existing products decreased 1.1% to                $29,835                compared with $30,173 in 2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services as a percentage of the related revenue increased                to 39.5% for the quarter ended September 30, 2007 compared with 28.6%                in                2006. The increase in the percentage of cost of professional services                is                related to the decrease professional services                revenue |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

|   | · | Cost                of hardware sales for the quarter ended September 30, 2007 increased                to                $94,367 compared with $66,951 in                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in cost of hardware sales is directly related to the increase                in                hardware sales. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in the cost of hardware sales as a percentage of the related                revenue is due to products that we sold during the quarter that have                a                lower markup. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Operating      Expenses:*

|                                        |   | Three                    months ended September 30, |    | Change |   |
|---------------------------------------------|--------|-----------------------------------------------------|---------|--------|--------|
|                                        |   | 2007                                                |    | 2006   |   | Amount |   | % |   |
| Sales                  and marketing        |   | $                                                   | 86,325  |   | $      | 132,124 |   | $ | (45,799 | ) |   | (34.7 | ) |
| General                  and administrative |   |                                                | 307,440 |   |   | 254,650 |   |   | 52,790 |   |   | 20.7 |   |
| Amortization                                |   |                                                | 189,747 |   |   | 148,144 |   |   | 41,603 |   |   | 28.1 |   |
| Depreciation                                |   |                                                | 52,843  |   |   | 57,062 |   |   | (4,219 | ) |   | (7.4 | ) |
| Total                  operating expenses   |   | $                                                   | 636,355 |   | $      | 591,980 |   | $ | 44,375 |   |   | 7.5 |   |

*Sales      and Marketing:*

|   | · | Sales                and marketing expenses for the quarter ended September 30, 2007 decreased                34.7% to $86,325 compared with $132,124 in                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses as a percentage of total revenues decreased                to 8.6%                for 2007 compared with 13.0% for                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses related to the Questa acquisition for the                quarter                ended September 30, 2007 were                $15,135. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                decrease in sales and marketing for the quarter ended September 30,                2007                is due to efficiencies that have been created by the consolidation                of our                marketing efforts subsequent to our acquisition of                Questa. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses for the quarter ended September 30, 2006 were                unusually high due to the Questa acquisition and expenses we incurred                initially for changes in our marketing materials due to the                acquisition. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*General      and administrative:*

|   | · | General                and administrative expenses for the quarter ended September 30, 2007                increased 20.7% to $307,440 compared with $254,650 in 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses as a percentage of total revenue increased                to                30.5% for the quarter ended September 30, 2007, compared with 25.0%                in                2006. The increase in general and administrative expense as a percentage                of total revenue resulted from the Questa acquisition and the increases                referred to above. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | General                and administrative expenses related to the Questa acquisition for                the                quarter ended September 30, 2007 were                $72,359. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in general and administrative expense was related to the                $72,359                related to the Questa acquisition and a professional fee of $25,000                offset                by a reduction of $26,274 in insurance costs and a reduction in expenses                related to investor relations of                $34,500. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Amortization:*

|   | · | Amortization                expense increased 28.1% to $189,747 for the quarter ended September                30,                2007 from $148,144 in 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in amortization expense related to the acquisition of Questa                was                $78,318. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Amortization                expense as a percentage of total revenue increased to 18.8% for the                quarter ended September 30, 2007 compared with 14.5% in 2006. The                increase                in the percentage of amortization expense is related to the Questa                acquisition. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Depreciation:*

|   | · | Depreciation                expense decreased 7.4% to $52,843 for the quarter ended September                30, 2007                from $57,062 in 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Depreciation                expense related to the acquisition of Questa was                $2,999. |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Depreciation                expense as a percentage of total revenue decreased to 5.2% for the                quarter                ended September 30, 2007 compared with 5.6% in                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Other      Income (Expense):*

|                                                           |   | Three                  months ended September                  30, |    | Change |   |
|----------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|--------|--------|
|                                                           |   | 2007                                                               |    | 2006   |   | Amount |   | % |   |
| Investment                  income                             |   | $                                                                  | 4,483   |   | $      | 6,465 |   | $ | (1,982 | ) |   | (30.7 | ) |
| Gain                  (loss) on sales of marketable securities |   |                                                               | (516    | )      |   | 18,280 |   |   | (18,796 | ) |   | (102.8 | ) |
| Interest                  expense                              |   |                                                               | (65,563 | )      |   | (33,522 | ) |   | (32,041 | ) |   | 95.6 |   |
| Total                  other income (expense)                  |   | $                                                                  | (61,596 | )      | $      | (8,777 | ) | $ | (52,819 | ) |   | 601.8 |   |

*Investment      Income:*

|   | · | Investment                income decreased to $4,483 for the quarter ended September 30, 2007                from                $6,465 because of lower invested balances subsequent to the acquisition                of                Questa. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | We                realized a gain of $18,280 on the sale of marketable securities during                the                quarter ended September 30, 2006 when we sold temporary                investments. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Interest      Expense:*

|   | · | The                increase in interest expense is a result of the debt related to the                Questa                acquisition outstanding for the entire quarter ended September 30,                2007                and only for a portion of the quarter ended September 30, 2006 when                the                transaction was closed. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Provision      for Income Taxes:*

----

**Nine      months Ended September 30, 2007 Compared to Nine months Ended September 30,      2006**

*Revenue:*

|                                   |   |   | Nine                  months ended September                  30, |   |   | Change    |   |
|----------------------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|-----------|--------|
|                                   |   |   | 2007                                                              |   |   | 2006      |   |   | Amount |   |   | % |   |
| Software                               |   | $      | 431,582                                                           |   | $      | 649,519   |   | $ | (217,937 | ) |   | (33.6 | ) |
| Maintenance                            |   |   | 1,933,436                                                         |   |   | 1,186,512 |   |   | 746,924 |   |   | 63.0 |   |
| Professional                  services |   |   | 462,359                                                           |   |   | 412,481   |   |   | 49,878 |   |   | 12.1 |   |
| Hardware                               |   |   | 121,314                                                           |   |   | 192,919   |   |   | (71,605 | ) |   | (37.1 | ) |
| Total                  revenue         |   | $      | 2,948,691                                                         |   | $      | 2,441,431 |   | $ | 507,260 |   |   | 20.8 |   |

*Software:*

|   | · | Revenue                from software sales for the nine months ended September 30, 2007                was                $431,582 compared with $649,519 for the nine months ended September                30,                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Questa products was $299,008 for the nine months ended September                30, 2007. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales of Avatar products decreased 73.7% to $132,574 compared with                $503,962 for the nine months ended September 30,                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Software                sales were unusually strong for the nine months ended September 30,                2006                while 2007 sales for the same period in 2007 have been                disappointing. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Maintenance                revenue for the nine months ended September 30, 2007 increased 63.0%                to                $1,933,436 compared with $1,186,512 in                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Maintenance                revenue related to the Questa acquisition was $654,867 for the nine                months                ended September 30, 2007. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Maintenance                revenue for existing products increased 22.5% to $1,278,569 compared                with                $1,044,021 in 2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in maintenance revenue was primarily related to the strength                of                ASP sales in 2006 and 2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

*Professional      services:*

|   | · | Professional                service revenue for the nine months ended September 30, 2007 increased                12.1% to $462,359 compared with $412,481 for the same period last                year. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services revenue related to the Questa acquisition was                $217,687. |
|--------|--------|-------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Professional                services related to existing products decreased 27.4% to $244,672                for the                nine months ended September 30, 2007 compared with $337,028 in                2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                demand for professional services for the nine months ended September                30,                2007 has been weaker because of lower software                sales. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Hardware:*

|   | · | Hardware                sales for the nine months ended September 30, 2007 decreased to $121,314                compared with $192,919 in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Questa                was not a reseller of hardware products. We expect hardware sales                to                increase in the future because of the acquisition, anticipated technology                changes and relationships that we have with hardware                vendors. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Cost      of Revenue:*

|                                   |   | Nine                  months ended September                  30,   |    | Change                     |   |
|----------------------------------------|--------|-------------------------------------------------------------------------------|---------|--------------------------------------|--------|
|                                   |   |  2007                                                                    |    |  2006                           |   | Amount |   | % |   |
| Software                               |   | $                                                                             | 136,858 |                                 | $      | 274,603 |   | $ | (137,745 | ) |   | (50.2 | ) |
| Maintenance                            |   |                                                                          | 386,069 |                                 |   | 226,274 |   |   | 159,795 |   |   | 70.6 |   |
| Professional                  services |   |                                                                          | 163,760 |                                 |   | 103,013 |   |   | 60,747 |   |   | 59.0 |   |
| Hardware                               |   |                                                                          | 113,285 |                                 |   | 158,578 |   |   | (45,293 | ) |   | (28.6 | ) |
| Total                  cost of revenue |   | $                                                                             | 799,972 |                                 | $      | 762,468 |   | $ | 37,504 |   |   | 4.9 |   |

*Software:*

|   | · | Cost                of software sales for the nine months ended September 30, 2007 decreased                50.2% to $136,858 compared with $274,603 for the nine months ended                September 30, 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales of Questa products for the nine months ended September                30, 2007 was $51,720. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales for existing products decreased 65.2% to $85,138                from                $244,354 in 2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software as a percentage of the related revenue decreased to 31.7%                for                the nine months ended September 30, 2007 from 42.3% in                2006. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of software sales decreased primarily due to lower commission costs                on                lower sales volume. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Our                primary supplier of database components has changed their pricing                structure so that the database is now available for distribution                to us at                no cost. We had expected an increase cost of software sales in the                future                because the supplier had previously increased the price of the database                component. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Maintenance:*

|   | · | Cost                of maintenance revenue for the nine months ended September 30, 2007                increased 70.6% to $386,069 compared with $226,274 in                2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance revenue related to the Questa acquisition was $76,006                for                the nine months ended September 30,                2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance revenue for existing products increased 71.5% to $310,063                compared with $180,795 for the same period last year. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance as a percentage of the related revenue remained increased                slightly to 20.0% for the nine months ended September 30, 2007 compared                with 19.1% in 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of maintenance increased in relation to the increase in maintenance                revenue. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

*Professional      services:*

|   | · | Cost                of professional services for the nine months ended September 30,                2007                increased 59.0% to $163,760 compared with $103,013 in                2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services related to the Questa acquisition was $80,160                for                the nine months ended September 30,                2007. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services for existing products increased 8.5% to                $83,600                compared with $77,026 in 2006. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services as a percentage of the related revenue increased                to 35.4% for the nine months ended September 30, 2007 compared with                25.0%                in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Cost                of professional services increased because professional services                with a                higher cost component were                performed. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Hardware:*

|   | · | Cost                of hardware sales for the nine months ended September 30, 2007 decreased                to $113,285 compared with $158,578 in                2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Operating      Expenses:*

|                                        |   |   | Nine                  months ended September                  30, |   |   | Change    |   |
|---------------------------------------------|--------|--------|-------------------------------------------------------------------|--------|--------|-----------|--------|
|                                        |   |   | 2007                                                              |   |   | 2006      |   |   | Amount |   |   | % |   |
| Sales                  and marketing        |   | $      | 312,583                                                           |   | $      | 271,161   |   | $ | 41,422 |   |   | 15.3 |   |
| General                  and administrative |   |   | 931,693                                                           |   |   | 555,459   |   |   | 376,234 |   |   | 67.7 |   |
| Amortization                                |   |   | 569,242                                                           |   |   | 344,467   |   |   | 224,775 |   |   | 65.3 |   |
| Depreciation                                |   |   | 155,057                                                           |   |   | 159,499   |   |   | (4,442 | ) |   | (2.8 | ) |
| Total                  operating expenses   |   | $      | 1,968,575                                                         |   | $      | 1,330,586 |   | $ | 637,989 |   |   | 47.9 |   |

*Sales      and Marketing:*

|   | · | Sales                and marketing expenses for the nine months ended September 30, 2007                increased 15.3% to $312,583 compared with $271,161 in                2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses related to the Questa acquisition for the                nine                months ended September 30, 2007 were                $45,223. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses for our existing business increased 8.2% to                $267,360 from $246,984 in 2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Sales                and marketing expenses as a percentage of total revenues decreased                to                10.6% for 2007 compared with 11.1% for                2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*General      and administrative:*

|   | · | General                and administrative expenses for the nine months ended September 30,                2007                increased 67.7% to $931,693 compared with $555,459 in 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses related to the Questa acquisition for                the nine                months ended September 30, 2007 were                $199,451. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses for our existing business increased 52.3%                to                $732,242 from $480,899 in 2006. General and administrative costs                increased                primarily due to higher salaries, charge-offs from bad debts, professional                fees, telephone expense, franchise taxes, expenses related to our                user                conference, and accounting and auditing costs incurred related to                the                Questa acquisition. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | General                and administrative expenses as a percentage of total revenue increased                to                31.6% for the nine months ended September 30, 2007, compared with                22.8% in                2006. The increase in general and administrative expense as a percentage                of total revenue arising from the Questa acquisition and the increases                in                cost referred to above. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Amortization:*

|   | · | Amortization                expense increased 65.3% to $569,242 for the nine months ended September                30, 2007 from $344,467 in 2006. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | The                increase in amortization expense related to the acquisition of Questa                was                $234,954. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Amortization                expense as a percentage of total revenue increased to 19.3% for the                nine                months ended September 30, 2007 compared with 14.1% in 2006. The                increase                was due primarily to the addition of amortizable assets from the                Questa                acquisition. The increase in the percentage of amortization expense                to                total revenue was reduced by higher reported total                revenues. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Depreciation:*

|   | · | Depreciation                expense decreased 2.8% to $155,057 for the nine months ended September                30,                2007 from $159,499 in 2006. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Depreciation                expense related to the acquisition of Questa was                $8,998. |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   |   |   |
|--------|--------|--------|
|   | · | Depreciation                expense as a percentage of total revenue decreased to 5.3% for the                nine                months ended September 30, 2007 compared with 6.5% in 2006. The decrease                is related to higher reported                revenue. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Other      Income (Expense):*

|                                                    |   |   | Nine                  months ended  |   |   |               |   |   |         |   |
|---------------------------------------------------------|--------|--------|------------------------------------------|--------|--------|--------------------|--------|--------|--------------|--------|
|                                                    |   |   | September                  30,      |   |   | Change   |   |
|                                                    |   |   | 2007                                |   |   | 2006          |   |   | Amount  |   |   | %  |   |
| Investment                  income                      |   | $      | 12,945                                   |   | $      | 18,770             |   | $      | (5,825       | )      |   | (31.0 | ) |
| Loss                  on sales of marketable securities |   |   | (531                                     | )      |   | 18,022             |   |   | (18,553      | )      |   | (102.9 | ) |
| Interest                  expense                       |   |   | (206,509                                 | )      |   | (39,212            | )      |   | (167,297     | )      |   | 426.6 |   |
| Total                  other expense                    |   | $      | (194,095                                 | )      | $      | (2,420             | )      | $      | (191,675     | )      |   | 7,920.5 |   |

*Investment        Income:*

|   | · | Investment                income decreased to $12,945 for the nine months ended September 30,                2007                from $18,770 because of lower invested balances subsequent to the                acquisition of Questa. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | We                realized a gain on the sale of marketable securities of $18,022 during                the                nine months ended September 30, 2006 when we sold temporary                investments. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Interest      Expense:*

|   | · | Interest                expense increased because of the debt incurred by the Company to                acquire                Questa. The increase in interest expense for the period ended September                30, 2007 includes nine months of interest on the outstanding debt                to                purchase Questa contrasted with approximately 45 days for the period                ended                September 30, 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Provision      for Income Taxes:*

**Liquidity      and Capital Resources**

*Cash      flows from Operating Activities:*

----

*Cash      Flows from Investing Activities:*

*Cash      Flows from Financing Activities:*

*Working      Capital:*

----

**Item      3. Controls and Procedures**

**PART      II. OTHER INFORMATION**

**Item      1.****Legal Proceedings**

**Item      2.**
** **
**Unregistered      Sales of Equity Securities and Use of Proceeds**

**Item      3. Defaults Upon Senior Securities**

**Item      4. Submission of Matters to a Vote of Security Holders**

**Item      5.**
**      Other Information**

**Item      6. Exhibits**

| 31.1                Section 302 Certification pursuant to Sarbanes Oxley                Act. |
|----------------------------------------------------------------------------------------------|
| 32.1                Section 906 Certification pursuant to Sarbanes-Oxley                Act  |

----

**S**
**ignatures**

|                                        |                                                                         |                                                     |
|---------------------------------------------|------------------------------------------------------------------------------|----------------------------------------------------------|
|                                        | AVATAR                SYSTEMS, INC.                                          |
|                                   |                                                                    |                                                |
| **Dated:                November 29, 2007** | By:                                                                | /s/ ROBERT              C.              SHREVE, JR. |
|                                        | Robert              C. Shreve, Jr.                                           |
|                                        | Chief                Executive OfficerChief                Financial Officer |

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